An underweight position in equities combined with a large holding in defunct NZX-listed insurer CBL saw the $40 billion Accident Compensation Commission (ACC) miss its after-costs benchmark for only the second time in more than quarter of a century.
“However, we underperformed our benchmarks by 0.1 per cent if adjustments are made for investment costs and taxes,” the just released 2018 ACC annual report says. “This was a disappointing result as we hope to outperform our benchmarks over time by a margin that is significantly higher than the costs of managing our investments.”
Before investment costs (of $52 million or 0.14 per cent of total assets under management), the $39.7 billion ACC fund outperformed its composite benchmark by just 0.01 per cent to maintain a 23-year of consecutive index-beating results. In its 26-year history the ACC fund only fell behind the benchmark (before costs) once – during the 12 months to June 1995.
Since inception the ACC has returned just over 10 per cent per annum against its benchmark 8.61 per cent. However, the fund’s minor stumble in the latest financial year was due to a “tactical asset allocation positioning” call to “hold a lower-than-benchmark exposure to equity markets throughout the year”.
While the fund outperformed the respective benchmarks of most underlying asset classes it lagged the index for both NZ and global equities by 0.4 and 0.2 per cent, respectively.
“An investment in failed insurer CBL Corporation was the key reason for this [NZ equities] underperformance,” the ACC report says. ACC owns about 3.5 per cent of all shares available to trade on the NZX. (Fellow Crown Financial Entity, the also $40 billion NZ Superannuation Fund – NZS – owns roughly 5 per cent of shares listed on the NZX.)
By comparison the global equities-heavy NZS returned 12.43 per cent over the year, more 2 per cent above its reference portfolio. However, the $4.5 billion Government Superannuation Fund also missed its benchmark for the 12-month period.
In spite of the after-cost benchmark disappointment, the ACC fund returned almost $3.6 billion over the 12-month period against a budgeted $1.4 billion. The above-forecast return was due to “the impact of revaluation gains from declines in bond yields”, the ACC report says.
“… we do not expect returns to be so strong in the future,” the reports says, with the ACC projecting long-term portfolio performance of about 5 per cent – or half what it has achieved to date.
ACC manages about $3 billion in NZ equities, $1.8 billion in Australian shares and $6.3 billion via global share markets. The government fund – headed by chief investment officer, Nicholas Bagnall – manages all NZ shares, most Australian equities and 20 per cent of its global share portfolio in-house.
Set up to fund the no-fault national injury insurance scheme, the ACC investment operation allocates approximately 70 per cent of the portfolio to fixed income assets (mostly local) to match long-term liabilities. In addition to its equities holdings the fund also has a combined roughly $2.2 billion invested in listed and unlisted property and infrastructure as well as private equity.
ACC owns about a quarter of Kiwi Group Holdings (the home of Kiwibank and Kiwi Wealth) valued at $325 million – the fund’s single largest asset. In 2016 ACC and NZS teamed up to buy about 45 per cent of the government-owned (via NZ Post) Kiwi Group.
This year the ACC – among others – lost a case regarding an attempt to wind up the George Kerr-linked Torchlight fund. The ACC report records no contingent liabilities involving litigation. We will have to wait until next year for that information. Insiders say the action was both “disastrous and embarrassing” for the fund.
During the year, the ACC organisation saw a number of top-level departures including: chief change integration officer, Debbie Barrott; chief operating officer, Jim Stabback; chief governance officer, Gaye Searancke; and, chief financial officer, Mark Dossor (who the ACC investment executive report to).
The ACC investment team has been stable for many years, the report says.
In total, the ACC employed 945 staff earning above $100,000 per annum over the latest financial year with an average income for that group of over $146,000.
– David Chaplin, Investment News NZ
